What Do Healthcare Reform and the 'Fiscal Cliff' Have In Common? Tax Increases

On June 28th, the U.S. Supreme Court upheld the new healthcare reform law in part by ruling that (1) the individual mandate is a tax and (2) Congress has authority to impose the individual mandate under Congress's taxing power. As a result, all of the new healthcare reforms enacted under the law remain on the books. Also important is that all of the new tax provisions that were enacted to pay for the expansion of healthcare coverage remain in full-force.

Why Is This Important?

Every company – large or small, nonprofit or for-profit – is bracing for the projected "fiscal cliff" at the end of 2012. If Congress does not act by the end of this year, the scheduled spending cuts (known as "sequestration") take effect, along with the expiration of the reduced individual income tax rates, the $5 million estate and gift tax exemptions, and the favorable tax rates for capital gains and dividends (i.e., the Bush-era tax cuts). Now that the new healthcare reform law has been upheld, companies and individuals also must brace for new taxes on investments and wages that go into effect January 1, 2013.

What Are These New Taxes?

The most notable taxes that take effect on January 1, 2013, are (1) the additional Medicare payroll tax rate and (2) a "Medicare contribution" tax on investment income.

Additional Medicare Payroll Tax Rate

The new healthcare reform law increases the employee portion of the Hospital Insurance ("HI") payroll tax by 0.9% for individuals with wages in excess of $200,000 and for families with wages in excess of $250,000. These dollar thresholds are not indexed. It is important to emphasize that the 0.9% increase is not applicable to the employer's portion of the HI tax.

While the new tax will not have a direct economic impact on employers, it will create administrative challenges, as employers will have to modify and monitor the manner in which they withhold the HI payroll tax from employee paychecks. Under this new provision, an employer is required to withhold the additional 0.9 percent tax only for employees with wages in excess of $200,000 for the year. This means that if an employee earns wages less than $200,000, the employer is not required to withhold any additional amounts. Even if the combined wages of the employee and the employee's spouse exceed $250,000 for the year, the employer will not be required to withhold the additional 0.9 percent tax on those wages if the employee, himself or herself, earns less than $200,000 in...